Lessons from the trenches: Tips from a leasing company’s Chapter 11
Todd Wolynski, partner at White & Case, looks at what he learnt as general counsel and chief administrative officer of Waypoint Leasing during its Chapter 11 restructuring.
About a year ago, I completed the most exhausting marathon of my life serving as the chief lawyer during the cross-border restructuring and chapter 11 of Waypoint Leasing, an Ireland-based helicopter leasing company. I joined Waypoint Leasing shortly after it started operations in the newly formed helicopter leasing industry. After the first few years of meteoric growth, the collapse in oil & gas prices hit the helicopter industry hard. We soon found ourselves dealing with bankrupt customers and eventually reached the brink of financial distress ourselves. I then spent the next two years navigating a cross-border Irish-US restructuring and bankruptcy involving so many colorful twists and turns—and personalities—that the experience could be adapted into an award-winning mini-series. As with all things, the restructuring finally came to an end, but the lessons I learned about building and then taking apart a company will last a lifetime.
The fixed-wing leasing community, with its gravitational center in Ireland, is experiencing a global shock right now due to the COVID-19 crisis. This crisis is much different from the crisis that hit the helicopter community prior to the pandemic and is now compounded by it. However, the legal and practical issues that fixed-wing leasing companies may face are similar. And though I’m not qualified to practice in Ireland, the challenges I faced at Waypoint Leasing are highly relevant to fixed-wing leasing companies today. As such, I want to share the following tips to help general counsels and other in-house lawyers at Irish-based leasing companies who may soon find themselves in unfamiliar territory.
1. Protect yourself
The first thing I recommend is to dust off your Directors’ and Officers’ liability policy (D&O Policy). Do a basic check—make sure all your entities are in fact covered, understand your coverage limits (and compare them against peer companies) and know when your coverage is set to renew.
If a potential bankruptcy or similar filing is in your future, make sure you purchase a tail policy and factor it into any liquidity forecasts (as it will be a multiple of your annual premium). Most D&O Policies will expire upon a “change of control” event, which can include, without limitation, emergence from a bankruptcy proceeding or the sale of substantially all of the assets of the company (which may occur during a bankruptcy proceeding). The tail policy will protect the remaining officers and directors from any claims made against them after the policy expires. The typical term is six years after a triggering event. When negotiating your tail policy, make sure if you end up not using the policy that you can apply the relevant premium against any future D&O renewal premiums.
Make sure your D&O Policy is recognized in the jurisdiction where your covered entities are incorporated and where your directors and officers are located. Most D&O Policies are held by the holding or parent company, which may or may not be formed in the jurisdiction of its subsidiaries or affiliated entities. For example, for Irish-based leasing companies, the D&O Policy may be held by a foreign holding entity, but cover all of the Irish-based asset-owning and leasing companies. Certain countries, like Ireland, enact regulations that do not recognize an “offshore” D&O Policy. This means, for example, if your D&O Policy covers Irish directors and officers and is issued outside of Ireland, then your Irish directors and officers may not be able to receive the proceeds of such D&O Policy to protect them in the event of any claims. This overlooked and serious issue can be solved by purchasing an Ireland-specific “passport” policy via your D&O broker. The “passport” policy will cost you an additional premium but is worth the extra cost to protect your Irish-based directors and officers. Remember: Irish directors have civil (and sometimes criminal) liability for the actions of the company and in some cases can be held personally liable for all the debts of the company.
In addition, check the terms of your D&O Policy to make sure it will protect you in the event of a bankruptcy or similar filing. Certain provisions to look out for include, without limitation, (i) “change of control” terms—make sure the mere filing of bankruptcy protection and/or an insolvency proceeding is not a “change of control” under the D&O Policy (thereby terminating the policy); (ii) “insureds v. insured” exclusion—claims made by a bankruptcy trustee or similar persons need to be carved out; and (iii) Side A, Side B and Side C Coverage—ensure you have appropriate levels. If you do not have an internal D&O expert, contact your D&O broker or work with a reputable law firm that has dealt with cross-border D&O issues.
Finally, be honest with your broker/advisors about your financial condition; a good broker will be your advocate and will make sure you have the policy needed to protect you and your fellow officers and directors.
2. Understand your duties
Somewhere, on the windy path towards a restructuring or bankruptcy filing, the rules of the road can change. It is not clear when that happens—the “zone of insolvency” is a gray and murky place—but it will happen and you better be prepared. In-house lawyers should refresh themselves on the relevant fiduciary duties that management and its directors owe to its various stakeholders. This includes understanding when you are insolvent and understanding how your fiduciary duties change when such an event occurs, and/or when you are approaching such an event (i.e., the so-called “zone of insolvency”). Moreover, the rules vary across jurisdictions.
Under Delaware law, after the 2007 Gheewalla case, the Delaware Supreme Court has held that fiduciary duties do not extend directly to creditors until there is an actual insolvency. Until the occurrence of an actual insolvency, fiduciary duties are still owed to the corporate entity and its stockholders, and Delaware directors will be protected by the “business judgment rule.” Further, when a company files for chapter 11 in the US, the company becomes a debtor-in-possession—essentially a trustee—and owes fiduciary duties under the US Bankruptcy Code, primarily to its creditors.
Irish law, on the other hand, is more prescriptive, and recognizes a shift in fiduciary duties when a company is in the “zone of insolvency.” When an Irish company is in the zone of insolvency, its directors’ fiduciary duties are expanded to include its creditors; directors must consider creditors’ interests when making decisions. There are other practical considerations Irish directors need to take into account when heading towards insolvency, including, for example, heightened scrutiny its directors must apply when granting “financial assistance for the acquisition of shares.” This type of financial assistance regularly occurs in aircraft financings when assets are refinanced by an inter-company transfer of the equity of the asset-owning entity. You should consult your Irish legal counsel, but granting financial assistance is a “Restricted Activity” under the Companies Act 2014, and a summary approval procedure (SAP) must be completed before financial assistance can be granted. The SAP is a detailed process and requires outside Irish legal support. Most relevant to this discussion, it requires a declaration of solvency from the relevant board that captures the ensuing 12 months. If the directors give the declaration of solvency, and if the company is wound up and its debts are not paid during the following 12 months, then directors are presumed to have lacked reasonable grounds to make such a declaration. As a result, an Irish court may then find the directors personally liable (without any limitation of liability) for all debts of the company.
In-house counsel should liaise with outside corporate counsel in each of the relevant jurisdictions where your entities are incorporated and procure legal advice on their fiduciary duties. This legal advice should set out in writing management and director obligations and fiduciary duties during periods of normal operations, insolvency and, if applicable, the zone of insolvency or similar period. Ensure your board and fellow management members are educated on this topic so they can understand the framework under which they are operating when making decisions. Irish directors in particular are subject to strict criminal and civil liabilities if they breach their obligations, including, as noted above, being held personally liable for the debts of the company. And remember, the above should not only apply to your main operating or holding board, but to every board in the company group.
In addition, increase the frequency of board meetings and ensure your minutes are up-to-date. Directors do not like to be surprised, and they need to ensure their decisions are being made with an up-to-date understanding of the company’s solvency. As noted, determining whether you are solvent, insolvent or in the “zone of insolvency” is a fact-intensive analysis based on local case law and/or legislation; it is likely that if you are in financial distress, you will be completing this analysis on a regular basis.
3. Know your trigger points and tread carefully
If your financial condition begins to deteriorate, you have to take extra steps when it comes to accessing capital under existing financings. Obtain advice under applicable law regarding your ability to meet any drawdown conditions, including any solvency representations and warranties, and/or MAE conditions. Procure written legal advice on this topic so you can refer back to it as the situation progresses. In addition, make sure you walk your CEO, CFO and any other relevant management members through the relevant representations and warranties each time you draw down funds, especially when there are “knowledge” qualifiers. Before increasing any indebtedness via a new debt facility or a drawdown, confer with your board before doing so, even if you do not otherwise require board approval. Irish directors will be particularly concerned about incurring additional indebtedness as the company continues down a path of financial distress.
Chart out all relevant events of default, related grace periods, acceleration and remedies clauses in your loan agreements, purchase agreements and other material contracts. Look at your leases as well—while not standard, make sure your lessees do not have any termination rights in the event of your insolvency; while you may not have negotiated these clauses, you might have picked them up from prior portfolio acquisitions. During this period of financial distress, you should understand what covenants are at risk and how long you have until you are in danger of tripping those covenants. Doing this preparatory work may seem onerous, but it will save you time and money if you eventually find yourself needing to request extensions from your lenders or having to prepare a bankruptcy filing; it will also help you figure out how much time you have before a potential insolvency event.
4. Track the money
If you have not done so already, familiarize yourself with your company’s cash management system. Intercompany debt is widely used to move money within a company group. Unfortunately, while the accountants are good at moving the funds, the papering of intercompany debt may be lagging—or, in fact, never completed. Make sure you are up-to-date on papering existing intercompany indebtedness. At Waypoint Leasing, our financings were secured by specific collateral pools owned by a segregated group of borrowers and subsidiary guarantors. Funds were routinely borrowed across these silos, and we kept detailed records and loan documentation to evidence the same. When the music stopped, our lenders understandably needed to know what liabilities and obligations existed between and among the various silos. Managing the intercompany debt flow during the bankruptcy was a challenging process, but it was possible because the accounting and legal department had a detailed system to track and paper the intercompany debt. Failure to do so would have resulted in chaos and a tremendous waste of time and energy retracing our steps. In addition, make sure your existing intercompany debt is compliant with any financing requirements. Finance arrangements will typically require that such intercompany debt is made on an arm’s-length basis and is subordinated to the relevant third-party financings. Finally, understand that a restructuring (whether in- or out-of-court) is an expensive process. In an ideal situation, if a restructuring is a possibility, you will want to build up your war chest. To properly prepare for the rainiest of rainy days, you must understand what restrictions you have on moving funds from one group of companies to another. This analysis goes beyond reviewing your financing documents—consult with experienced counsel to determine if there are any constructive fraud issues by moving money from one entity to another and, if applicable, when such rules would apply to your company.
5. Location matters
As in real estate, location is everything in bankruptcy. Understanding what forums of bankruptcy are available to you and which will maximize creditor value will make all the difference between a successful and unsuccessful bankruptcy. Many Irish companies may not be familiar with the US Bankruptcy Code or even realize that this is an option. Unlike the insolvency regimes of most other countries, a company need not be organized or domiciled in the US to qualify as a chapter 11 under the US Bankruptcy Code. Rather, a non-US company often can file for chapter 11 so long as it has at least some property located in the US, and there are established precedents for such filings. Therefore, you should consult with experienced restructuring counsel to determine if chapter 11 is an option.
Further, a chapter 11 filing may be preferable for your restructuring as opposed to a traditional Irish liquidation, scheme of arrangement or examinership. The US bankruptcy system has a robust history, with a process and procedures that seeks to maximize value for all creditors. To the extent creditor value will be maximized by keeping the business as a going concern (or even selling the business as a going concern in a Section 363 sale), the US Bankruptcy Code’s “debtor in possession” system will allow the existing management team to continue to operate the business, thereby ensuring continuity of service to its lessee clients and value preservation. In addition, unlike other systems, the US Bankruptcy Code allows a chapter 11 filing even if the debtor is not insolvent. That means you do not have to wait for disaster to strike before restructuring your debts. Moreover, with proper preparation and adequate creditor support, there is even the opportunity to complete a US restructuring through a “pre-packaged” chapter 11 case that allows a company to minimize both the time in (and therefore the cost of) a chapter 11 case.
For Irish-based leasing companies, it is important to note that Ireland is not a signatory to the UNCITRAL Model Law on Cross-Border Insolvency 1997, and will not necessarily recognize a primary bankruptcy proceeding in the US. However, boards can take comfort that, subject to your creditor mix, it is unlikely that your largest creditors will violate the global reach of the US Bankruptcy Court’s worldwide automatic stay and will respect an approved chapter 11 plan.
6. Get help
If you take away one concept from this article, it is this: Get help! Even if you started your career as a restructuring lawyer or consultant, you will not be able to manage this on your own.
First, find yourself an experienced independent director with restructuring experience. Your existing directors may not have experience with distressed situations; and even if they do, you and your directors will need (and will want) an independent director who can help make the hard decisions (because there will be many). An experienced independent director will be able to draw on his/her experience to instill best practices on the relevant boards and management team. As you move deeper into the zone of insolvency, conflicts of interest can develop among directors and, potentially, between a director (or directors) and the company, leaving only the independent director to mediate disputes and to vote on necessary measures. Without a proper independent director to shepherd the process, you could find yourself in a paralyzed state with no good options for moving forward.
Next, as referenced throughout this article multiple times, find yourself trusted and competent counsel in all the relevant jurisdictions. This means not only qualified local counsel in each of the jurisdictions where your entities are organized, but also finding a strong quarterback (or scrum-half for you rugby fans) that can manage a coordinated restructuring effort among all the jurisdictions and professionals. For leasing companies, this will mean a law firm with a strong cross-border restructuring and aviation finance practice. Unfortunately, if you end up having to file for chapter 11 protection or a similar proceeding, the number of professionals will only increase. Thankfully, the restructuring community is a small one, and your main restructuring counsel and your new independent director will help steer you toward the best professionals for your particular situation.
The only thing I can tell you with certainty is a restructuring is truly a marathon. It is a long slog made up of many tiny milestones. The main problem is you don’t know how long the race will be and the finish line keeps moving. To top it off, the added complexities of Irish insolvency and fiduciary duties definitely can send you off-course. But, if you remember anything from the list above, when you get lost, it’s ok to stop, catch your breath and ask for help.
These tips were developed with input from my colleague Richard Kebrdle, a partner in White & Case’s Financial Insolvency and Restructuring practice. This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.